Sumitomo Chemical India (NSE:SUMICHEM) Is Aiming To Keep Up Its Impressive Returns

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Sumitomo Chemical India's (NSE:SUMICHEM) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Sumitomo Chemical India:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.21 = ₹5.1b ÷ (₹34b - ₹9.3b) (Based on the trailing twelve months to June 2023).

So, Sumitomo Chemical India has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Sumitomo Chemical India

Above you can see how the current ROCE for Sumitomo Chemical India compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sumitomo Chemical India.

So How Is Sumitomo Chemical India's ROCE Trending?

In terms of Sumitomo Chemical India's history of ROCE, it's quite impressive. The company has employed 147% more capital in the last five years, and the returns on that capital have remained stable at 21%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Sumitomo Chemical India can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 28% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

Sumitomo Chemical India has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 53% return if they held over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

While Sumitomo Chemical India looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether SUMICHEM is currently trading for a fair price.

Sumitomo Chemical India is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.